The engines were prone to oil sludge from coking deposits even when maintained according to the automaker's recommended maintenance intervals and oil-quality specifications, court documents show.

“Each plaintiff claims that his or her vehicle was damaged or will suffer future damages as a result of the alleged sludge and coking problems,” court records show.

The multi-state suit was consolidated in Massachusetts in 2006 according to lawyers representing car owners. The suit also claims VW and Audi failed to honor an 8-year unlimited warranty extension issued in 2004 by denying claims brought by vehicle owners with sludge-related engine failures.

VW and Audi have agreed to “cover 100 percent of the maintenance costs for owners/lessees with proper documentation of required oil changes, and 50 percent for those without proper documentation,” plaintiff lawyers said in a statement today.

The settlement also provides owners and lessees eligibility for a 10-year/120,000-mile enhanced oil sludge warranty, according to a statement issued from lawyers Peter McNulty, Kirk Tresemer, and Russell Henkin, who represent the vehicle owners.

All class members who currently own or lease the covered vehicles will also receive revised oil-maintenance recommendations.

A Volkswagen AG spokeswoman said the two sides are still finalizing the settlement.

“The terms haven't been worked out--the exact compensation or remediation is not yet finalized,” the spokeswoman said.

VW said letters will be sent out to owners around Dec. 20, and the final amount of the settlement will be determined by the number and size of claims paid.

VW began notifying owners of the problem in August 2004 after receiving consumer complaints. The automaker's remedies ranged from extending warranties to covering repair costs, including complete engine replacement.

Sludge buildup can cause engine performance to deteriorate, and in extreme cases, engines to lock up.